Mental Models discussed in this podcast:
- First Principles
- Asset Duration
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Show Outline
Investing First Principle
Every security or financial asset MUST be owned by someone at all times until that security is retired. This holds true for stocks, bonds, cash in the bank, QE, and any other similar financial asset. This is an investing first principle.
Implications for Investors
- It is impossible for investors to “get out of the market” in the aggregate.
- There are never more sellers than buyers or more buyers than sellers.
- Buyers and Sellers MUST match in order for transactions to occur.
- If the price rises to handle demand, that doesn’t mean there were more buyers in the market than sellers.
- Likewise, if prices fall it doesn’ mean there were more sellers than buyers.
- Once the transaction occurs, sellers and buyers match.
- Someone, somewhere, will receive the implied rate of return for each and every asset that exists.
- If bonds are priced to lose money through maturity (due to negative interest rates) then it is guaranteed that investors, in the aggregate, WILL lose money on the bonds.
- It is possible for some speculators to make money in the interim and sell out to greater fools. But someone has to lose even more money to accommodate that speculator’s profit.
- Stocks don’t discriminate.
- Stocks don’t care what your race, ethnicity, skin color, gender, age, sexual orientation, or country of origin is.
- Stocks don’t know that you own them. Everyone is presented with an equal opportunity to own stocks as long as they are willing and able to pay the market price.
- In some respects, that makes stock investing (and other financial assets) one of the most egalitarian ways of building wealth available.
- If a financial asset has an unlimited duration (such as common stock), no one can force you to sell it. All of the proportional dividends for that company are yours and your future beneficiaries for the rest of time.
- This should be very empowering.
- Once you acquire a share of stock, you have permanently locked-in a share of future profits and dividends. You have permanently raised your lifestyle potential.
- Implies buying a company that won’t go bankrupt and will have future dividends, but you should be seeking only those companies if you’re a listener to this podcast.
Summary:
Every security or financial asset MUST be owned by someone at all times until that security is retired. This holds true for stocks, bonds, cash in the bank, QE, and any other similar financial asset. This is an investing first principle. First-principles are useful for investors seeking to develop investing strategies from the ground up.
By using first-principles you can be assured of limiting your blindspots and not basing your strategy simply on what has worked in the recent past.
